The Treasury is making contingency plans for the breakup of the euro and an “Armageddon” scenario, Vince Cable has said.

But the business secretary argued that Italy was basically solvent and the pessimism and panic gripping the markets was overdone.

He said: “We have a plan … there’s a lot of scenario planning, thinking about all possible outcomes. We have to deal with the world as it is.”

Discussing Italy, he said the country was not in the same league as Greece.

“It’s not actually got a very big deficit on its budget, its economy is basically strong – the north of Italy is very strong, an export-based economy. A few basic things right and this problem should be dealt with.

“I don’t think we should be panicking, and although the situation is very difficult, and we’re inevitable affected by it, I think the extreme pessimism and gloom really isn’t justified in this case.”

He insisted Britain was better placed than the eurozone. “We have political stability, we have financial stability. What we don’t have yet is sustained growth,” he said.